S&P 500 slips 0.3%, Nasdaq drops 0.5% as AI selloff deepens

Technology stocks led US indexes lower for a second straight session as investors rotated out of semiconductors and artificial intelligence names into defensive sectors.

The S&P 500 fell 0.27% to 7,337.68 on Friday, extending a week of losses as the artificial intelligence trade unraveled and investors shifted into healthcare, consumer staples, and utilities. The Nasdaq Composite dropped 0.48% to 25,236.88, while the Dow Jones Industrial Average also closed lower.

"The market is repricing AI optimism after a relentless run, and the rotation into defensives tells you conviction is wavering," said Lori Calvasina, head of US equity strategy at RBC Capital Markets.

The selloff followed Thursday's decline, when the S&P 500 slipped less than 0.1% and the Nasdaq fell 0.24%, as semiconductor stocks including Sandisk and Micron Technology each lost more than 7%. Consumer cyclicals gained 1.52% on Thursday as the rotation began, while industrials dropped 1.34% and energy slipped 0.57%. Gold rose 0.96% to $4,086.40 an ounce, and the 10-year Treasury yield edged down 2 basis points to 4.38%.

The rotation signals waning risk appetite ahead of the final week of June, when the Federal Reserve's preferred inflation gauge — the core Personal Consumption Expenditures index — is due Thursday. Economists expect annual core PCE to rise to about 3.4%, a reading that could reinforce concerns that price pressures remain stubbornly high and keep the Fed on a hawkish path under new Chair Kevin Warsh.

Traders pointed to three catalysts driving the rotation: a hawkish shift from the Federal Reserve, with markets now pricing an 89% chance of at least one further rate increase before year-end; sticky inflation data that weighed on risk appetite; and profit-taking in semiconductor and AI names after a blistering rally. BofA Global Research is forecasting a further 75 basis points of US rate hikes this year. The tech-heavy Nasdaq finished the week down about 5% as the AI trade came under increasing pressure.

Billionaire investor Jeremy Grantham warned Thursday that US equities are the most expensive in history, cautioning of a potential wipeout. The divergence between the Dow and the Nasdaq underscored the breadth of the rotation: the Dow, with its heavier weighting in financials and industrials, has held up better than the tech-heavy Nasdaq during the selloff.

The coming week brings the core PCE release on Thursday, along with the Fed's annual bank stress tests. Any upside surprise in inflation data could accelerate the rotation out of growth stocks and into defensives.

This article is for informational purposes only and does not constitute investment advice.